Why the fed should ignore the stock market
The headlines are blaring that the stock market has had the worst start to a year since practically forever, and the "Markets in Turmoil" specials are filling the airwaves. It is entirely possible that the selloff reflects underlying risks to the global economy, but as I argue here, whatever is happening in the stock market is not adding any new information. In particular, the best course of action of the Fed is to ignore the panic, and the same holds for fixed income investors and macro economists.
However, the Fed has boxed itself in. Current projections imply rate hikes of about basis points a year, which corresponds to a 25 basis point hike every second meeting.
Why the Fed should ignore the stock market | Eric Schaling - umypecodayok.web.fc2.com
They could skip the next meeting and be consistent with this path. Unfortunately, they did not announce a strategy of hiking every second meeting, and so if they skip the upcoming meeting, people will interpret this as the Fed panicking.
Once again, the Fed should have not listened to the academics that told them that transparency was good; if they kept their mouths shut, nobody would be in a position to care about 0. The bond market should follow their expectations for the Fed, and also ignore the latest news flow out of risk markets beyond the credit markets. If you think the shock to the commodity sector is big enough to drive the economy into recession, you should have already positioned yourself for lower interest rates a few months ago.
If you don't think it is enough, you probably should be thinking that bond yields will be stuck in a trading range, and the lower end of that range will be reached sooner or later.
As for my view, I do not have enough information to make a recession call. Regular readers will have realised that I have a "glass half empty" world view, and that I do not see any fundamental reason for a rate hike.
However, I have enough faith in the "automatic stabilisers" within the economy that I see the current events just being another wiggle in the trajectory of sloppy growth that we have experienced since the end of the recession.
The situation for other countries is more complicated; it depends how exposed they are to the global commodity recession. Finally, I have run across a fair amount of discussion regarding the message of the "yield curve" - for example, the slope between the 2-year and year Treasury.
Why The Fed Should Ignore The Stock Market | Seeking Alpha
I doubt that there is a message. Why The Fed Should Ignore The Stock Market Jan.
Reasons To Panic The arguments to be deeply concerned about the U. The global commodity sector is in recession, particularly the energy sector.
If you have a business in Fort McMurray, you should panic that is, more than you already are. The North American unconventional oil business was in a major expansion earlier this decade, and that expansion is reversing. Commodity extraction uses a lot of heavy industrial equipment. Investment cuts will be felt by a global supply chain of capital goods producers, many of which are located far away from coal faces and oil rigs. Commodity producers will be cutting back their free-spending ways, causing a ripple effect on consumer goods producers globally.
It looks like we are due for some high yield bond defaults, which tends to have a chilling effect on financing in that market. Investors had been increasingly desperate to hit return targets, which led to investing and lending standards being stretched. This exuberance could reverse as investment projects fail. The United States economy was barely growing in the first place, with the employment-to-population ratio largely stagnant.
Why The Fed Should Ignore The Stock Market | Seeking Alpha
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